Forecasts for Interest Rates in UK

The UK economy is struggling. It faces the unwelcome twin problems of rising inflation and falling growth. With house prices falling consumer spending is drying up. Luxury food and clothes shops are going out of business and there is a strong threat of recession. The CBI and other business leaders are hoping that the MPC will cut interest rates. The lower rates will help to boost investment and consumer spending and maybe avoid a recession.

However, the other economic problem is rising inflation. INflation is increasing because of higher oil prices and food prices. This is contributing towards cost push inflation; this means the MPC should be trying to increase interest rates to reduce inflation.

The MPC will probably not increase interest rates because:

• The threat of recession is more serious than the threat of inflation.
• The inflation is cost push and hopefully temporary
• Falling growth should reduce wage push inflation and inflationary pressures.

The MPC could even cut interest rates to 4.5% if the economy does slide into recession. it would be most unusual for an economy to experience a recession without a cut in interest rates.

The problem with cutting rates is that they may not help increase spending very much. The level of debt is very high and people will take advantage to increase their savings rather than maintain old spending patterns.